Monday, February 15, 2010 6 comments

Articles for a holiday Monday--at least in Ontario, Canada

Finally catching up on investment articles and here is a long list of items you may not have run across.

  • (Recommended for macro-oriented investors) Panelist discussion with Marc Faber, Nassim Taleb, Hugh Hendry, and Others (The Russia Forum 2010; h/t Mish's Global Economic Trend Analysis): A video that includes two of my favourite investors, Marc Faber and Hugh Hendry. Great find by Mike Shedlock.
  • Will European government place capital controls on Euro speculation? (Controlled Greed): Controlled Greed picks up a story from the Financial Times (not available for free) where the author speculates on the possibility of European government enacting capital controls on macro traders. Apart from the likelihood that the government would be the loser against the free market (recall how the Asian Tigers lost the battle against speculators in the 90's or how Britain lost its battle against George Soros in the 90's,) I think this is a non-issue for a very good reason. Several key countries using the Euro have favoured a weaker Euro. Perhaps the most notable is France, which has complained about the strengthening Euro in the past. So a weakening Euro would be looked upon favourably. Even Germany, which is heavily leveraged to exports, might be ok with it. A weaker Euro will also minimize the damage from those insolvent and near-bankrupt borrowers in Eastern Europe. Everyone seems to have forgotten the big stories from the last two years but let's not forget that a lot of people in Eastern Europe took on foreign (Euro-denominated) loans to buy homes/cars/etc and have had difficulties paying them back. In fact, the problem in Greece is quite minor compared to those swept-under-the-carpet problems in Eastern Europe and the Baltic region (I'm still not sure what happened all those potential losses to GE from that region.) Hard currency fans always think there is a major crisis whenever the currency weakens but people like me, who are more Keynesian-oriented, know that you get a trump card along with a currency devaluation. (Having said all that, I expect financial transaction taxes and other measures but that has nothing to do with the Euro situation.)
  • (opinion) The ascent of Brazil (Notes From the Dark Corners of The Global Economy): Robert Smith provides an overview of what's happening in Brazil and suggests that Brazil is joining the big leagues. As I have suggested in the past, Brazil is probably the most likely of the large emerging markets to succeed over the next few decades. I don't have any investments in it but if I had to blindly bet on one of the BRICs for the next two decades, I would go with Brazil. One thing investors should keep in mind is that Brazil is very cyclical and heavily sensitive to commodity prices. It depends heavily on exports such as iron ore, soybeans, aircraft, and steel (it benefits from high oil prices too.)
  • (recommended) Value Investing Primer (ValueHuntr): Pretty much touches on the core aspects of value investing. Very good overview, especially if you are not familiar with value investing.
  • Analyzing inventories and receivables (Old School Value): Jae Jun provides his thoughts about how to analyze inventories and receivables.
  • (recommended) NCAV (net current asset value) investing primer (Wayne A. Thorp via Old School Value): If you follow any value investing techniques, one of the first decisions faced by newbies is to follow the quantitative-oriented, Benjamin-Graham-style investing or to follow the qualitative, growth/moat/industry-focused, Warren-Buffett-style investing. There is overlap between the two—the ideal investment IMO is something that has qualities Warren Buffett favours while having a valuation that Graham would be happy with—but the core investment universe tends to differ materially. NCAV investing falls into the former and the linked article summarizes the strategy. If you have very good fundamental analysis skills, or have greater interest in financial statments than, say, business strategy or studying industries, I think you should pursue the Graham-style investing. NCAV investing is one of the top strategies with a strong historical record in the Graham camp. (For what it's worth, I have purposely chosen not to pursue NCAV investments except in some special cases (usually liquidations or severely distressed companies.))
  • Another example of incompetent management - Sea Energy (Wide Moat Investing): I have been catching up on some reading and here is a good blog post talking about a questionable transaction by management of a small company that ends up destroying a huge chunk of shareholder wealth. Management may be good but not when it comes to creating shareholder wealth. When the post was written in January, the proposed transaction looked questionable and now, with a month's hindsight, it has turned into a total disaster. The stock price has collapsed and, for what it's worth, management has decided to exit the original proposed acquistion. Just about the only positive thing I see in this situation is the ticker symbol, SHIP. It fits their shipping industry business very well ;) Management may have one shot at redeeming themselves: although very risky if one doesn't know the true worth of a business, it is possible to create shareholder wealth by buying back shares right now, if current shares are actually undervalued. Issuing shares at high prices and then buying them back at low prices is one of the most profitable ways to create shareholder wealth.
  • Lessons learned from an investment mistake in TGAL (Chroma Investing): It's good to make your mistakes when you are starting out and have a small portfolio. I need to start doing post-mortems on some of my disastrous investments.
  • An Entreprneurship Story - Erin Pim's Teatree Cafe and Eatery (The Star): A look at the very early state of an eatery opened by Erin Pim in Toronto. So far the eatery appears to be a success and I wish Erin all the best. For those interested in entreprneurship, this might be an interesting cursory look at the early stages of a business. I think it's worth noting how Erin has financed it all from savings (no debt,) has kept costs low by recyling items (this actually fits her restaurant theme,) and done a lot of the work on her own. The only concern I have is that accounting seems non-existent and that's probably the next big thing for her to tackle.
  • (opinion) Canada's version of Fannie and Freddie - CMHC (Financial Post): In an opinion piece for the Financial Post, Peter Foster raises some concerns that the Canada Mortgage and Housing Corporation—CMHC is kind of like the GSEs in America. The Canadian residential real estate market is nowhere near as bad as USA was so the damage is likely to be limited. Nevertheless, I'm bearish on housing in many parts of Canada and I think the CMHC should strengthen their risk management.
  • Top-earning Athletes at the Vancouver 2010 Olympics (Forbes; h/t Financial Post): Fun statistics for the winter Olympics. According to Forbes, the top-earning athlete at the winter Olympics is a tie between American snowboarder, Shaun White, and South Korea figure skating specialist Kim Yu-Na. Both of them earned around $8 million in 2009. But the compensation drops off significantly after the top 2 with income dropping to $3 million.
  • Canadians Starting to Fly Out of American Border Towns (Financial Post): Not exactly a new story—I recall one of my co-workers flying out of Buffalo, NY rather than Toronto for North American vacations—but it seems to have gained popularity. A hotel association executive is quoted as saying, "It's Plattsburgh for Montreal, but it's Seattle for Vancouver, Grand Forks [N. D.] for Winnipeg, Messina and Syracuse, N.Y., for Ottawa and Buffalo for Toronto. In the east coast it's Bangor, Maine." I haven't had a foreign vacation in years :( but when I was looking at buying a car in the US recently, I was seriously thinking of flying out of Buffalo. There is a massive difference in prices as this traveler was quoted in the article: "I saved $3,000 flying to Fort Lauderdale. It was $4,500 [for a family of four] to fly from Toronto but only US$1,200 from Buffalo. On top of all that it's just so much simpler with U.S. Customs. You stay in a hotel overnight and most of them will even let you leave your car there [while on vacation]. I guess the only risk is the weather and missing a flight." Business travelers probably wouldn't put up with the hassle and the risk of missing flights but if I went on a vacation in the future, I would seriously consider flying out of Buffalo. There is even a Greyhound bus from Toronto to Buffalo for $20 if you don't want to drive & park, and are willing to put up with an extra 3 or 4 hours bus trip.
  • (recommended if you are interested in business strategy) Key Issues Impacting Supply Chain Management (MIT Sloan Management Review via Financial Post): Some of you reading this will probably end up as poor investors but I hope some of the articles I link will at least help you succeed in your career and climb up the corporate ladder :) In the linked article, Professor David Simchi-Levi identifies 6 factors that are changing the way companies manage their supply chains:

    There are six trends, and they all present challenges to thinking about supply chain management. The first is globalization, an old force that continues to morph and that is producing longer and longer lead times. The second is the significant increase in logistics costs, due to changes in transportation cost and inventory... The third trend is the increase in the level of risk that many companies are exposed to. This flows from embracing strategies like lean manufacturing and outsourcing and offshoring...  The fourth trend is a significant increase in labor cost in developing countries... The fifth trend is the way companies are starting to focus on sustainability.
    I think most of these issues are well-known, established, trends but it's still good to sit back and think about the basic, core, drivers. As an example consider the fourth trend of increasing labour costs in developing countries. This can signficantly alter the business landscape over the next 20 years. For the last 20 years, outsourcing labour to cheaper countries was almost a fool-proof way of increasing corporate profitability; but that will likely not be the case for the next 20 years.

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6 Response to Articles for a holiday Monday--at least in Ontario, Canada

February 16, 2010 at 4:31 AM

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February 16, 2010 at 8:27 AM

In the spirit of varied interests, let me add that

I've decided to take a full (5%) position in SAB, and a small (2-3%) position in SPCO.  To me, the numbers speak for themselves, but if anyone thinks these companies look interesting, I'd be glad to comment further.

Jae Jun
February 17, 2010 at 3:48 AM

Hey I always wondered why you dont go deeper into Graham style investing. I know you prefer macro but include that to Graham stocks and I bet you'll be powerful returns. You were right about xerox as well.

February 17, 2010 at 7:27 PM

What are the ticker symbols for those companies? SPCO doesn't seem to be a valid ticker symbol and SAB seems to be Mexican brewer (is that what you invested in?)

February 17, 2010 at 7:29 PM

I don't think I'm strong enough with fundamental analysis. You are actually pretty good--I haven't commented much but have read your reviews of potential investments, not to mention your work with those Excel tools--so I can see it fitting you nicely. As for me, I'm not sure.

But having said that, most successful investors need to have above-average fundamental analysis skills and maybe I'll put more effort into that in the future.

April 2, 2010 at 3:14 AM

<span>I don't think I'm strong enough with fundamental analysis. Cruise You are actually pretty good--I haven't commented much but have read your reviews of potential investments, not to mention your work with those Excel tools--so I can see it fitting you nicely. As for me, I'm not sure.

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